QUESTION 2: CAPITAL BUDGETING (20 marks)

Mrs. Wen has an option of investing in either a piggery or a broiler enterprise. She has estimated the cash flows over the 7-year life of the two projects. During the seventh year the piggery and broiler can be sold for N$20 500 and N$5 500 to a scrap dealer, respectively. The cash flows can be summarized as follows:

Piggery Broiler

Initial investment

100 000 35 000

Year

1 12,000 3,500

2 13,000 4,500

3 16,900 6,700

4 17,500 7,800

5 15,200 7,900

6 18,600 8,500

7 18,100 8,900

Additional information:

The cost of capital (discount rate) is estimated to be 12%.

Determine:

a. the Net Present Value of both investments

b. the payback period of both investments

c. In which enterprise should Mrs. Wen invest? Explain your answer.

NOTE: please show ALL detailed calculations as marks will be allocated accordingly.